Pros & Cons of Rent to Own Homes

Some landlords offer rent-to-own programs without ever "selling" a single home

When you have bad credit, renting is often your only option. However, your dream of owning a home can still become a reality. If you can't qualify for a traditional home loan or afford a down payment, renting with a lease option could sound appealing. Rent-to-own agreements offer many benefits, but they also have the potential to damage you financially. Weigh the pros and cons and read the contract carefully to ensure you're not buying into one with unrealistic terms.

Common Rent-to-Own Agreements

Typical rent-to-own contracts require you to pay monthly rent to the homeowner, who holds a portion of this amount to go towards your future down payment. You'll also pre-pay a non-refundable lease option fee in most programs. These contracts usually last two to five years, then you either buy the house for the original, agreed-upon price minus any equity you've built. You may also opt to move out with the probability of losing any investment you have in the property, including your lease option fee. Since there isn't a "standard" rent-to-own contract, arrangements can be complex and vary based on individual state regulations. Each contract is usually negotiable, so consult with a real estate agent or lawyer prior to signing to fully understand the financial implications.

Pro: No Credit Needed

Because lease purchase contracts are made between individuals, you don't have to qualify for a loan that requires a decent credit score. In the intervening time, you can work on rehabilitating your credit, so you have a better chance of qualifying for a traditional loan. Plus, you also won't need mortgage insurance and in lieu of a substantial down payment, you usually pay a minimal lease option fee.

Pro: You're Not Obligated to Buy

While leasing to own, you gain familiarity with the home, so you can decide whether you want to go through with ownership. If you end up not liking the home after renting for a time, the flexibility of these programs means you're not obligated to buy it. However, there are monetary consequences when you choose not to purchase the property.

Pro: Build Equity

While paying rent, you're also building equity in your home -- something you never get with traditional rental contracts. You start building equity after your first payment and continue accumulating equity each month as the owner saves an agreed-upon portion of your rent to help with your future down payment. Over a few years, you can save a decent little nest egg.

Con: Losing Money

There are a lot of ways you can lose a large sum of money in rent-to-own situations. For one, landlords charge more for lease purchases, than they do for a standard lease, and you have the additional charge for the purchase option. A portion of your monthly rent goes towards your future down payment, if you qualify for a mortgage later. If you can't afford to purchase the home, then you'll forfeit all this money. The owner/seller could also put your home in jeopardy, if they don't keep up on their own mortgage (if applicable) and property taxes and the home goes into foreclosure. If the home is owned by a couple who divorces during the interim, you could also run into issues when they divide assets.

Con: Beware of the Cons

If the wording in your contract is ambiguous, the fees seem overly high or the predetermined price of the property is well above current market value, you could be getting conned. Some landlords offer rent-to-own programs without ever "selling" a single home, nor do they intend to. They offer contracts that make it almost impossible for you to execute the option, so they can take back the property and charge the next person exorbitant fees with no intention of ever selling the home. Be leery of elements in the contract that allow the seller to terminate the arrangement for unjustifiable reasons.

Con: You May Never Own the House

The majority of rent-to-own tenants wind up not owning the home, which is the riskiest part of investing in these programs. While your lease option gives you first dibs on the home, it doesn't mean you'll be approved for a mortgage when the time comes. If you can't pay or finance the remaining portion of what you owe, the owner will most likely evict you and keep all the monies you've invested. He keeps your money and the property and you start over with even less money than you had to begin with.